2025 (10) TMI 59 - HC - GST

s.74 GST action quashed where petitioner had filed and paid taxes via GSTR-1 and GSTR-3B despite supplier cancellation

M/s Singhal Iron Traders Versus Additional Commissioner And Another

HC held that initiation of proceedings under s.74 GST against the petitioner was unjustified where the petitioner had filed and paid taxes via GSTR-1 and ... Initiation of proceedings u/s 74 of the GST Act - registration of the supplier was cancelled subsequent to the transactions in questions - purchases were disclosed from a non-existing dealer - fraud or misrepresentation made by the petitioner or not - HELD THAT:- It is not in dispute that the supplier filed its return in the forms of GSTR-01 and GSTR-3B. Moreover, it is also not in dispute that without making payment of due taxes, GSTR-3B cannot be generated. Once the tax was paid by the petitioner in the forms of GSTR-01 and GSTR-3B, no adverse inference can be drawn against the petitioner on the premise that the registration of the dealer from whom the purchases were shown to be made, was cancelled subsequently. It was the duty of the authorities to verify the said information as to whether at the time of transactions, the firm was in existence or not, and therefore, without verifying the same, the authorities ought not to have initiated the proceedings against the petitioner only on the borrowed information as the petitioner discharged its preliminary duty by making the payment of due taxes through banking channels - Further, it is not the case of the revenue that the vehicle used for transportation was not found registered and therefore, the initiation of proceedings against the petitioner cannot be said to be justified and are liable to be quashed by this Court. The impugned orders cannot be sustained in the eyes of law and the same are hereby quashed - Petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether proceedings under Section 74 of the GST Act can be validly initiated against a registered purchaser where the supplier's registration was cancelled after the transactions complained of. 2. Whether Input Tax Credit (ITC) claimed by the purchaser can be disallowed and reversed, and penalty imposed, where the supplier had filed GSTR-1 and GSTR-3B (indicating tax payment) and consideration was paid through banking channels. 3. Whether the tax authorities may act on third-party information that the supplier is 'non-existing' without verifying the supplier's existence at the time of the transactions. 4. Whether absence of an adverse finding specifically regarding transportation/e-way bill registration undermines the initiation of proceedings under Section 74. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of Section 74 proceedings where supplier's registration was cancelled post-transaction Legal framework: Section 74 of the GST Act permits initiation of recovery proceedings where tax has not been paid due to fraud, willful misstatement, or suppression of facts. The statutory focus is on existence of culpable conduct at the relevant time and on the taxable event and tax liability. Precedent Treatment: The Court did not reference any binding precedent in the judgment; the approach is statutory and fact-based. Interpretation and reasoning: The Court emphasizes temporal relevance - the critical inquiry is the supplier's registration and conduct at the time of the supply and return filing. Where the purchaser demonstrates that the supplier was a registered dealer at the time of the transaction and that supplier filed GSTR-1 and GSTR-3B for the relevant periods, subsequent cancellation of the supplier's registration (post-transaction) cannot, without more, sustain inference of fraud or justify Section 74 proceedings against the purchaser. Initiation of Section 74 proceedings based solely on subsequent cancellation constitutes reliance on 'borrowed information' without establishing fraudulent or willful conduct contemporaneous with the transactions. Ratio vs. Obiter: Ratio - Section 74 cannot be invoked against a purchaser merely because the supplier's registration was cancelled after the transaction when contemporaneous records show compliance. Conclusions: Proceedings under Section 74 were not justified on the facts where supplier had been registered at the time of supply and had filed returns for the relevant periods. Issue 2 - Validity of ITC claim and penalty where supplier filed GSTR-1/GSTR-3B and payments were made through banking channels Legal framework: Entitlement to ITC ordinarily depends on satisfaction of statutory conditions, including receipt of tax invoice, filing by supplier of returns, and payment of tax. Penal consequences under GST are tied to fraud, misrepresentation, or suppression of facts. Precedent Treatment: None cited or relied upon; Court applies statutory conditions to the factual matrix. Interpretation and reasoning: The Court finds that the supplier's filing of GSTR-1 and GSTR-3B for the period and the purchaser's proof of payment by banking channels satisfy the purchaser's preliminary compliance duties. Because GSTR-3B cannot be filed without payment of tax (as noticed by the Court), the supplier's filed returns negate an automatic presumption of tax default by the supplier for the relevant period. In absence of any material showing the purchaser's knowledge of fraud, misrepresentation, or participation in evasion, reversal of ITC and imposition of equal penalty on the purchaser was not sustainable. Ratio vs. Obiter: Ratio - Where supplier has filed GSTR-1 and GSTR-3B and tax payment is shown, a purchaser who has fulfilled documentary and payment requirements cannot have ITC reversed nor equal penalty imposed solely because the supplier's registration was later cancelled, absent evidence of purchaser's complicity or fraud. Conclusions: The ITC claimed by the purchaser was properly claimed on the materials; the penalty and reversal were unjustified and were quashed. Issue 3 - Obligation of authorities to verify supplier's existence at the time of transactions before acting on information that supplier is 'non-existing' Legal framework: Administrative action must be based on materials and verification; adjudicatory process requires verification of facts relevant at the time of taxable transactions. Precedent Treatment: No precedents were invoked; the Court applied principles of due inquiry and burden of proof in administrative action. Interpretation and reasoning: The Court holds that authorities cannot proceed to adverse action against a purchaser merely on the basis of third-party or post-hoc information that the supplier is non-existing. Authorities had a duty to verify whether the supplier actually existed and was registered at the time of the transactions. The purchaser discharged its primary on-record obligations - valid invoices, e-way bills and banking evidence of payment - and thus the onus lay on the revenue to conduct verification before initiating Section 74 proceedings. Ratio vs. Obiter: Ratio - Administrative reliance on unverified information regarding supplier's existence is impermissible where the purchaser has demonstrable contemporaneous compliance; verification by authorities is a prerequisite to adverse action. Conclusions: Proceedings initiated without such verification were unjustified and liable to be quashed. Issue 4 - Relevance of lack of adverse finding regarding transportation/e-way bill registration to sustain Section 74 action Legal framework: Compliance with transport and e-way bill formalities may be relevant to establishing genuineness of supply and taxable event; absence of such non-compliance undercuts allegations of sham transactions. Precedent Treatment: No authority cited; Court applied commonsense evidentiary reasoning. Interpretation and reasoning: The revenue did not contend that the vehicle used for transportation was unregistered or that e-way bill requirements were violated. Given that e-way bills were generated for the purchases and no adverse finding was made on transportation non-compliance, the factual basis to infer sham or nonexistent transactions was weak. Lack of challenge on transport formalities further undermined the initiation of Section 74 proceedings. Ratio vs. Obiter: Ratio - Absence of any adverse finding on e-way bill or transportation compliance weakens or negates the basis for Section 74 action premised on sham transactions. Conclusions: The absence of transportation/e-way bill objections contributed to quashing the Section 74 proceedings. Overall Disposition Where purchases were supported by valid tax invoices, e-way bills, banking evidence of payment, and the supplier had filed GSTR-1 and GSTR-3B for the relevant period, the initiation and confirmation of Section 74 proceedings, reversal of ITC and imposition of penalty on the purchaser-based solely on subsequent cancellation of the supplier's registration and unverified information that the supplier was 'non-existing'-were unsustainable. The impugned orders were quashed.